Sources of Funding

In a recent article we talked about improving cashflow and feedback has been positive. But what if you need a cash injection into your business – for a variety of reasons? Gone are the days when it was a straightforward trip to the Bank Manager. Indeed SMEs are still finding it difficult to get the necessary finance to grow or support their businesses.

But where there is a need, there is opportunity and now in 2015 we have an almost bewildering choice of sources of business finance. Indeed it can now be quite a daunting task to choose the best options for your business. We have found the Ultimate Guide for SMEs on Alternative Finance to be an excellent and straightforward guide but before you click through, here is a very brief summary of some of the lending types available:

Bank loanThe traditional route but often banks prefer to lend to companies with experienced owners that can show a history of profit and stability. Even companies that are eligible for bank financing sometimes find the terms stifling.

Asset based lendingSimilar to a bank line of credit but with a few key differences: The main one is that the amount of money you are able to borrow is primarily based on a percentage of the total assets under consideration. In most cases the lender can provide up to 85% of the accounts receivables and up to 60% of the inventory.

FactoringA factor purchases your accounts receivables and advances 70% to 90% of the total. Often factoring is used by service-based companies that don’t have collateral, start-ups, companies with seasonal work and companies that are growing quickly. It’s also useful for companies that have hit hard times and need cash flow to turn around their business.

Merchant Cash AdvancesThese providers offer businesses a lump sum of capital. You pay a set percentage of your daily credit cards sales until the cash advance company recovers their advance and premium. This is a useful solution for companies like restaurants with strong credit card sales that need capital to grow their business or purchase new equipment.

Purchase Order FinanceThis form of finance generates working capital to pay for finished goods or components based on your customer’s purchase order. A Purchase Order Finance company pays your supplier to produce and ship goods so you can fulfil a customer’s order. Once you fulfil the order, you invoice your customer and send a copy to the P.O. finance company. They collect payment for that invoice and return the payment to you, less a fee. This is a solution for companies that need increased cash flow to take on new business or expand their operations.

Peer to peer lendingSMEs are able to borrow directly from other organisations and individuals. Interest rates have improved dramatically in recent years and now compare very favourably with those offered by banks.

CrowdfundingCrowd funding continues to grow in importance. A raft of new sites like Crowdcube and Seedrs are driving this growth, selling shares for as little as £10 per investor.

Pension-led fundingThe liberalisation of rules around pensions has seen a growth in the number of investors looking to loan parts of their retirement pots to small businesses at favourable rates.

Self-issued retail bondsA small but growing area in the UK, retail bonds present a lower risk to investors than equity. They promise an annual payment and the paying back of the capital at the end of a bond’s term.

Community Development Financial Institutions (CDFI)Another developing market in Britain, CDFI finance is primarily targeted at SMEs operating in less well-off communities where access to bank finance may be particularly challenging.

Grants, business angels, private equity, venture capital etcThey may have been around for decades, but these more established means of funding and help continue to grow in importance as bank lending flatlines.